Long-Awaited IRS Whistleblower Rule “Fix” Is Released for Comment

We have written previously about Senator Grassley’s pointed criticisms of aspects of the IRS whistleblower rules proposed in June 2010. The IRS’s delay in finalizing those rules is a principal reason why the IRS has not yet paid whistleblowers who have come forward since the December 2006 creation of the new IRS Whistleblower Program.

Today, the IRS took a large step to correct one major flaw that Grassley urged be corrected: re-writing a bizarre rule that would deny rewards to valuable whistleblowers who prevent improper refunds, or reduce a credit balance by a taxpayer. From what we can tell, that nonsensical rule was not the creation of the IRS Whistleblower Office, but of others within the IRS.

The IRS today announced a new IRS whistleblower rule to correct that anomaly, to be published for comment in the Federal Register.

Specifically, in a June 21, 2010 letter to Treasury Secretary Tim Geitner, Grassley challenged the IRS to write a sensible rule to correct this result:

In addition to the IRS posting the new [Internal Revenue Manual] provisions without public comment, there are many substantive concerns within the IRM. For example, the new definition of “collected proceeds” is particularly troubling because it seems to limit the payment of awards to whistleblowers only in those instances where the IRS receives cash payment from a taxpayer. . . . The denial of a whistleblower award where the whistleblower’s information leads to the denial of a claim for refund seems to create a perverse incentive for the whistleblower to wait until the IRS has paid an improper refund. In addition, the IRM says that satisfaction of a taxpayer’s liabilities by reducing a credit balance is not within the scope of collected proceeds so the whistleblower would receive no award.

The new proposed rule attempts at least a partial fix. It provides that rewards may now be paid on “amounts collected prior to receipt of the information if the information provided results in the denial of a claim for refund that otherwise would have been paid; and a reduction of an overpayment credit balance used to satisfy a tax liability incurred because of the information provided.”

Today’s proposed rule does nothing to address Grassley’s other criticisms of the June 2010 proposed rules.

For example, Grassley wrote that “section of the new IRM related to the administrative proceeding for whistleblower rewards contains a troubling provision requiring a whistleblower to sign a confidentiality agreement before receiving access to the preliminary award package. As a result, the individual would have no recourse to publicly question the award determination made by the IRS. Absent proper internal controls, this requirement of a confidentiality agreement has the potential to hush whistleblowers and provides the IRS a strong tool to force whistleblowers to accept a reduced award. This confidentiality appears to be in direct contradiction to the spirit and intent of the whistleblower provision I authored. The goal of this law was to bring information on tax fraud and tax cheats IN from the cold, not to bring it into an agency to be placed under lock and key.”

We hope that the resulting comments on the proposed rules will finally cause the IRS to allow the IRS Whistleblower Office to do its job, and to begin paying whistleblowers who have helped American taxpayers and thus have earned their rewards.

Today’s Notice by the IRS is linked here:

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